By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

We’ve already seen how, paraphrasing Archimedes, that financial instruments can move the world in a bad way. We have an opportunity to reverse that. Warren Mosler and I have just published a policy note at the Levy Institute that would, if implemented, bring an end to the Eurozone sovereign debt crisis.

The ‘tax-backed bond’ or ‘Mosler bond’ is based on the MMT idea that fiat money gets its value because the government accepts it in the payment of taxes. As the MMTers have been saying since the Eurozone crisis began the reason that the European periphery nations are having such a hard time with their sovereign debt burdens is because they do not issue their own currencies. The policy note we have just published outlines a new approach to the problem. The country will issue new tax-backed bonds that in the event a sovereign proves unable to meet its financial obligation to its creditors can be used to repay taxes in the country in question.

The policy note itself is short and readable enough (I hope), so for further information I’d ask the reader consult the document in the original. Here I would prefer to deal with the politics of the tax-backed bond approach and the chances we have of getting it accepted.

First of all, the reason Warren and I published this paper is because I have been able to drum up some interest from one of the main opposition parties in Ireland. In the coming weeks our hope is to present the idea to them and then, if all goes well, to the government themselves. I cannot promise this however and much will rest on my own lobbying abilities. I can, however, speculate as to how the plan might be perceived by those involved.

The Irish government should love the idea — and so should any other peripheral country considering it. If successful it will mean that they will be able to return to the international credit markets straight away. Given that this is what the Irish government currently aspires to above almost all else they should have few objections to immediate implementation of the plan.

If the plan works the government that adopts it will also see their austerity burden instantly relaxed. While it will be up to them what type of fiscal policy they run after the adoption of the scheme with interest rates held steady they will have a lot more policy space than they currently have.

We all know the lobbying power of the banks, of course — both national and international — so what about them? Well, they should adore the idea too. After all, many of them hold large amounts of government debt from Ireland and the periphery that is currently at risk of default. Many have also taken rather large losses on the recent Greek PSI deal (the haircut, in finance-speak). If the tax-backed bonds were deployed and yields fell the banks would see their balance sheets improve overnight as previously toxic assets became liquid once more.

But what about the rest of Europe? What about those that are currently pushing austerity? My thinking is that they will like the plan too. Ask yourself this: why is it that other European countries are so mad at the periphery right now? Well, its because they’re seen as leaching off the rest of the European system. The core countries today feel like they’re bailing out the periphery. They feel like they are racking up government debt and shouldering risk because the periphery countries cannot keep their own fiscal houses in order.

But if the tax-backed bonds work there won’t be any more bailouts! The periphery would become solvent on their own. They would no longer be seen as a burden on the rest of Europe. This would mean that Ms. Merkel and others could go back to their populations and honestly tell them that the periphery countries are no longer relying on them for support. Instead they would have have shouldered their own debt burdens and taken responsibility for their own balance sheets.

Furthermore, if the tax-backed bonds work we will see an easing of tensions within Europe. While the economic crisis will not come to an end without further policy actions the political crises will slowly but surely dissolve. The air of panic that is currently stifling Europe will be removed and everyone will be able to breath easy. With the crisis gone leaders will be able to sit down and have an adult conversation about the future of Europe; about trade imbalances and budget deficits; and about democratic accountability and capital flows. Only then can we put all the childishness of the past few years behind us and focus on the real issues.

One final note — for posterity. If this plan gets implemented and it works MMT will have won a major victory. How many economists and commentators have poo-pooed the ideas of MMT as being fanciful and needlessly contrarian? Well, if these ideas can be used to solve what has become a major financial, economic and even geopolitical problem MMT will have more than proved its worth as an area of serious study. If this plan were to work and the economics departments continue to shun the MMT approach we will then all know for sure that those working within them are not merely incompetent but criminally ignorant.

I don’t get it. Assuming the tax arbitrage works, the government is still out by the same amount of money as if they had just repaid it in full out of tax collections. Am I missing something? I suppose the economy could collapse to such a degree that no one is liable for taxes because no one is making or spending money, but I don’t think that’s what the authors intended.

From a legal perspective, making the bond UK-law doesn’t do anything to guarantee its acceptability to pay Irish-law taxes. Perhaps they could write it in a UK-Ireland tax treaty, but that’s still kind of weird since tax treaties usually don’t cover the tax payments of residents to their own local governments.

One, how long does it take for a bondholer to use up its tax-backed bonds to pay its share of taxes post-default? Can they sell them, if they can’t use them fast enough, to others who can use them?

Two, post-default, that government would need taxes to keep things going. But any such tax-backed bond used for tax payment at that time would reduce government revenue by the same amount, making things worse. Is that correct? Are we talking about not being able to wipe out debt with a default?

Second, and adding that’s one of the strengths of MMT considered as a community: The mix of strong academic, trading, and government experience. Fans of Donald McClosky’s epistemological “American Question” — “If you’re so smart, why aren’t you rich?” — should consider that some top-flight MMTers are actually out there in the market, and doing quite well, thank you. (Not to day that MMTers aren’t genuinely out to build a more humane economy — they are.)

“It doesn’t have to derive its value from its acceptance as the only acceptable form of tax payment.”

Money is a “social arrangement”. As in any (social) relationship it need not be perfect.

Requiring payment of taxes in dollars and creating/enforcing Legal Tender Laws only help to “corral” people into this (national currency) social arrangement who don’t willingly want to play ball but need to coerced into it.

Ultimately if the “social arrangement” is not worth it or too costly then too many people will seek to “divorce” out of it and the arrangement will come to an end (it will be replaced by another social arrangement for trading and saving).

The point is, does it really derive (or have to derive) its value from being used to pay taxes? MyLessThanPrimeBeef

No, not necessarily. Money is valued for other reasons such as inherent scarcity and tradition. Saddam Husein’s money continued to have value even after he was deposed because people knew there would be no more of it created.

Here’s how I think about the idea that the value of government fiat money derives from the requirement to pay taxes in units of government fiat. Suppose you live in Buffalo, and you have developed a local currency, which you like to refer to as Chips. The government says that a government 5 dollar bill is worth $5. You say fine, but so what?! I have no use for your five dollar bills. So the government says “You must pay taxes based on the value of your income, your barter arrangements, trading of gifts, etc.” You say you will pay with your local Chips. The IRS says that you must pay in dollars because your Buffalo Chips are worthless to them. So now the fiat $5 bill is worth more than your Buffalo Chips.

There may be a meaning in “currency” that has to do with being current, as in the current medium of exchange. Because it is required for those who pay taxes, that legitimacy elevates it to the practical current medium of exchange for everyone in the neighborhood, even the un-taxed underground economy.

“The key point here, however, is that since this tax backing would set an absolute floor below which the value of the asset could not fall…”

Colour me dumb, but how does it do that in an EU context? I understand the MMT point that currency acceptance and demand (and hence underlying value) is derived from taxation, but the very fact of international issuance would undermine that, a point you concede by suggesting a “…tiny markdown; say, 5 euros…” should an international investor be required to sell to an Irish bank so it can be redeemed. Why €5? Why not €20?

Does it not also imply a need to tax effectively, something that Ireland in particular seems keen not to do? Would it not be fair to suggest, that such a bond would be by its nature for domestic issuance? It only has full redemptive value where tax is a requirement?

As for the politics: I would suggest that you’re not reading what’s going on in Europe. If the fiscal compact is making anything clear it’s that this is a power grab. Austerity is increasing the debt load of the periphery and reducing the capacity for repayment, and yet this is to be written into our constitution. This isn’t even about electoral politics. This is about ideology and power, plain and simple. I honestly cannot see this flying.

Personally, I hope this damn Euro dies sometime soon. I know, careful what you wish for…. But you got something right. Sovereignty is at play. I for one will be voting no, regardless the cost. Let the Euro be damned.

Since tax-backed bonds have money-like characteristics, any large-scale use of them to pay taxes in a default scenario would effectively shrink the money supply, imposing a heavy deflationary impulse on an already bad situation.

Excessive debt is the root problem. Technocratic tinkering with its terms does not make excessive debt any more bearable.

any large-scale use of them to pay taxes in a default scenario would effectively shrink the money supply, imposing a heavy deflationary impulse on an already bad situation. Jim Haygood

Wrong. Unlike banks who might become afraid to lend in a deflationary environment (Prisoner’s Dilemma?), government would have no corresponding fear about spending new bonds into circulation so long as price inflation in those bonds did not become a problem.

Alright, let’s examine your scenario: the government emits new tax-backed bonds just as fast as they are redeemed.

In the U.S., the Treasury currently takes in $2.15 trillion in tax revenue, but spends $3.77 trillion. Even if ALL taxes are paid with redeemed bonds, you’ve got the pesky problem of a $1.62 trillion financing gap.

How to fill it? Not with conventional bonds — if tax-backed issues are being redeemed en masse, then conventional yields will be already too high to be sustainable.

By the way, the U.S. already ran this experiment on a small scale with ‘flower bonds,’ which could redeemed at par to pay estate taxes.

Who says it needs to be filled so long as price inflation in government money is not a problem? Moreover, the US should not spend bonds into existence as it currently does but non-interest paying fiat as Thomas Edison suggested.

Also: Excessive debt is the root problem. Technocratic tinkering with its terms does not make excessive debt any more bearable. Maybe excessive private debt is the problem, leading to lower spending, demand, production, employment. But then it is clear that insufficient rather than excessive government debt is the root problem. Mosler bonds are a quick fix for the insufficient government debt = money problem!

So long as the obligation is in euros, I’m not sure it changes much. Now if the governments had issued bonds that would devalue at the rate that their economy shrunk relative to the rest of the eurozone, then it would be a lot more like owing money in your own currency instead of someone else’s. So instead of offering to pay back what you borrowed plus interest, offer what you borrowed plus interest times the ratio of your GDP per capita tomorrow to that of the eurozone, divided by the ratio of your GDP per capita today to that of the eurozone. This might be a way to preserve the lowered transaction costs the euro provides while getting back the flexibility/trade-imbalance-correcting behavior that comes from independent currencies.

The austerity being imposed on the periphery is the EZ’s highly unsatisfactory method of dealing with lack of periphery competitiveness. If Mosler bonds have a stimulatory effect (i.e. bring less austerity) these bonds just undermine the above attempt to improve periphery competitiveness.

That in turn means that those holding Euro denominated periphery bonds will want even more interest.

But austerity is isn’t improving competitiveness other than wages may fall to 3rd world rates. Not only is that approach socially dangerous, but even if it worked as intended, how long would wages stay that low? Would there be little isolated pockets of peons out in the periphery happy to be treated as overhead and not as human assets?

All it takes is for one country to try the better route to competitiveness by throwing off the yolk and going back to Drachma’s or Pesos… show the rest how it’s done.

I don’t know EXACTLY how fast or slow austerity is improving competitiveness. If it’s not improving competitiveness relative to core countries, then the Euro is doomed. Perhaps it’s doomed anyway.

If austerity is results in wages falling to “3rd world rates” then the ES’s quaint way of improving competitiveness works. But I don’t accept that real wages need to fall to 3rd world levels. A 30% reduction in wages in nominal terms (i.e. in “Euro” terms) relative to core countries would do the trick. But that would NOT mean a 30% reduction in living standards because the bulk of the cost of goods and services consumed in periphery countries is the cost of periphery wages.

Let’s say wages fall by 30%. That means Greece’s outstanding debt is 50% higher relative to their tax base — they are now 50% farther away from solving their problem.

If they had been still on the drachma, and owed debt in drachmas, then the drachma could devalue by 30% and not affect their ability to pay debts. However going on the drachma now wouldn’t necessarily get them the euros they need to pay their debts. Their options may be exit the euro and default, or go through debt deflation, damaging their economy, and eventually default anyway.

“I promise to accept these bonds as payment of taxes in case I renege on my previous promise to pay back principal and interest on my old bonds”.

I think the bond market wouldn’t take this promise at face value. Mosler bonds would soon trade at a discount – comparable to what’s happening right now with the existing bonds of Ireland, Portugal and Greece.

Mosler bonds are a clever trick but you can’t solve a real crisis with clever tricks.

There are only two possible ways out for the present predicament: either full blown fiscal union with permanent transfers to the periphery or massive debt forgiveness plus the end of the currency union.

The sooner Europe’s citizens face and choose between these two alternatives the better.

Intuitively, I agree with this. If the Euro’s to work, the overall union has to be willing to bail out a state that finds itself in trouble. There has to be free movement of population between states. If all the good jobs are in Germany, for example, Greeks need to be able to flood into Germany, at will. Europe overall needs to behave like one nation, like the US. Otherwise, Greece should just get out. Intuitively, I mean, to this uneducated mind, this proposal sounds like a gimmic.

There seems to be a fundamental assumption that buyers of the bond have a tax liability which is due in the country. So there is an incentive for buyers who have such a tax liability, but not for those who do not (or am I missing something?). Surely not all bond buyers have a tax liability and so such bonds do not turn into “money good”. In such cases a default leaves the holder with worthless paper.

The circular arguments of the MMTers are tiresome. ‘money good’ is surely not just that which a central bank can print otherwise there would never have been a currency collapse in history.

Sure, the market would be restricted to taxable, domestic entities — or rather to only the portion of them that can forecast tax liabilities X years out (good luck), and they would want corresponding fractional amounts of the bonds (again, good luck), and they would need some likelihood estimate of default within each of those X years (from where). I don’t get the premise in the paper of a defaulted bond that continues to pay interest; clearly there is a magic bond that does not default on interest payments but only on principal, and continues to pay full interest after default at maturity. Of course without this magic (just print the money to pay interest, the EZ won’t object), there is an obvious problem for the bond holder: if the holder has excess bonds over its current tax liability at the time of default, they could only be sold at a discount to another taxpayer (who would then be subsidized by the seller), or the bonds would have to sit as non-earning assets on the holder’s books. So essentially holders would need two forecasts: their tax liability in years x1..xn, and the likelihood that they wouldn’t be holding excess bonds in each of those years. So from where is demand for these things going to come?

I agree that this is not the MMT ideal. The new bonds would not guarantee a ‘return on investment’ to the holder (especially a foreign holder). Since they would have an inherent value, though, it would mean that at least a portion of the bond would have a built in CDS effect. Thus a holder might not get all of his money, but he could be assured to get some of it (by selling it to someone who could use it for tax purposes).

I’m not sure how well that would work out for a nation that issues them.

I both like and dislike. Governments SHOULD be able to create their own money. However, NO private currencies (such as the Euro) should be acceptable for the payment of government debts. That is fascist privilege for a particular money or money form.

I guess in my understanding, this Bond is an attempt to spread a governments “Taxable Base” to anyone who owns the Bond. I’m no MMT theorist, but is that the operable principle? And if they do that, they then have bond presumably more stable than one financed with domestic taxes, which due to austerity will never be sufficient to establish solvency, as marginal wages plummet and public debt skyrockets.

So if I’m correct, then “theoretically” this dispersion of tax liability to non Irish citizens would make a more compelling argument, but I just can’t see it happening. If a US Citizen bought these bonds, and then decided not to honor the bonds, either it’s another default, or it’s tied up in litigation.

More generally, my thoughts on MMT are that they shouldn’t theorize on the power of fiat currency unless they fully accept that the fiat is enforced with courts, police, etc… In this case, that linkage is broken.

For those who don’t quite get it, this is an attempt to circumvent the draconion rules imposed by the European Central Banks. Taking the MMT idea that money is valued for it’s ability to extinguish tax liabilities, the bonds provide an added insurance of their value. If Ireland was not able to make it’s interest payments, these bonds could be used to extinguish tax liabilities instead. An individual bond holder might not have any Irish tax liabilities, however I’m sure he could find an Irishman to does to sell the bond to. The only problem I see with this is if the total amount of bonds outstanding exceeds the amount of taxes owed to Ireland. In that case, the bonds would go at a substantial discount. I see this as only a stop-gap measure until the EMU can get it’s act together.

So as the EU stands now, losses cannot be written off against taxes because they are not a political, taxing union. So borrow the write-off option from individual countries. That makes sense if there are enough Euros in circulation. Otherwise all those bonds could be expensed to the level that each country’s treasury is impoverished and that amounts to the same thing as austerity. No? Sorry, I can’t think thru this.

The assumptions concerning causes and present worries in PP’s propaganda piece are laughable as they completely bolster and promulgate the nefarious and absurd official narrative that it’s simply countries who have just somehow been spending too much money and that the world really just needs to protect the investor class at all costs.

Once again, PP ardently clings to the idea that somehow the EU crisis doesn’t involve the banking cabal.

The chimerical debts that are all of sudden plaguing the planet and keeping prolix propagandists – oh, he’s really on the people’s side – such as PP busy need to be wholly written off, guilty corporations need to disappear and many, many people need to go to jail for a long time.

Too bad we didn’t have MMT around in earlier crises, eh?

People could have sat around debating the intricacies of how better to play their slavemaster’s game instead of realizing that the whole system was far beyond redemption and that the time for serious cataclysmic action was needed.

I mean, really, what is so frickin’ hard to understand about people being stolen from and then subjugated by a cabal of financial elite?

Answer: Nothing and all this horsesh*t about this theory and that theory only delays the very visceral reckoning that needs to happen for everyone on the planet to get back to living their lives.

There may be times to cling to courtesy, politeness and reasoned debate a la PP but as concerns the worldwide financial crisis, the world is past that point.

If the words, “criminal”, “thieves”, “fraud” don’t appear in any article concerning any aspect of the worldwide financial crisis, then that article clearly is propaganda as again it lends credence to a narrative that is not true.

Perhaps the end point of this the creation of a new local currency? I don’t understand what happens when there is a default and the MMT bonds are put back to the government for payment of taxes, but here is one possibility.

When the bond is put back to the government, it has a big problem. It still needs to pay its bills but it does not have the euros it expected to receive. So it needs to issue a replacement bond to borrow some euros. If it is too expensive to do this, the government may eventually be forced to pay some of its local bills directly in newly-issued MMT bonds. And those bonds would be used in preference to euros for payment of taxes. The end point of this process would be a new local MMT currency trading at a discount to the euro.

Essentially, the interest rates are high because there are real imbalances which are not cured by the MMT bonds. Although MMT says that a country can borrow cheaply, this applies only when the debts are in its own currency which it can print to repay bonds.

The end point of this process would be a new local MMT currency trading at a discount to the euro. BlackBox

Maybe not. If no country accepted Euros for government debts then what value would Euros have according to MMT? Less, no? So if Ireland refused to accept anything but its own bonds for taxes then that move would INCREASE the value of its bonds and DECREASE the value of Euros.

I would be interested to hear their take on this from say Michael Hudson or Joe Firestone but this seems like a convolution of MMT theory in an elaborate way to save the euro rather than the EU populace.

Just another way of saving bondholders in their debt servicing rather than giving them the haircuts they deserve for imprudent investments..

MMT seems to work best for individual countries using their own currency. And in doing so there are natural limits including inflation and limits imposed by foreign exchange.

Why would an MMT adherent want to issue bonds at all? At it’s heart, doesn’t MMT proscribe simply the issuance of currency – like the United States Note (Lincoln Greenback)? Shouldn’t a sovereign government simply spend currency into existence? Borrowing money is simply a gift to the rentiers – people who loan money to governments taking the collateral of the future labor of taxpayers in return. That should be anathema to this board.

Print currency and spend it into existence, without interest and without debt.

To a mystic, all living beings are connected. They can feel the pain of a still living carrot being chewed to death by a sadistic vegetarian.

On one extreme, as a result, some of them advocate no eating of anything, be it meat or vegetable. Others recognizing the fluidity of human morality, concede modest and necessary eating is not immoral. They, however, insist that there be no buying/selling of living beings.

You shall not buy/sell a human being.
You shall not buy/sell an animal.
You shall not buy/sell a plant.

We are talking about the sanctity of life here.

What it means is that one must catch or grow one’s own food under the Flexible Morality Plan A. Basically, it’s very similar to Neo-Neanderthalism, which requires no printed money from the government.

That’s all but just one of the many different views you will encounter on this board.

Nice idea Philip – if it was a conventional sov debt crisis – however Irelands fate is tied to assets with perhaps a negative real value.
The country has potential for real productivity gains but only if these “assets” are written off completly.
If there is a safe decent yield off these instruments then the property market will become a cash only market.
Therefore these assets are written off and the country goes into deeper bankruptcy.
Catch 22.

The Euro & the european experiment is a expression of pure evil – we must now try to destroy it.
Just issue national taxable treasury paper and cut off both the domestic and european banking system from the tax spigot
Their credit destroys wealth so why do we need credit banks ?

I believe there has been a misuse of the term ‘lender of last resort’ in reference to purchase of sovereign bonds in the secondary markets. As far as I know, the term refers only to lending activity by central banks to their member banks, traditionally under specific conditions (Bagehot’s rule). The act of buying back government bonds to keep their yield within target interest rates, has been called ‘government banker’ by Thomas Palley. There may be other accepted terms I don’t know of.

If the European Monetary Union members are going to “issue” something that serves as “money” to the national government in running the national economy, then why not have them issue money, and avoid the debt?

That is probably what they should do. However, as noted above, that would require them to leave the Euro zone. That would make it difficult for the EZ members to buy their products and for them to buy EZ products. In the end, it was probably a catastrophic idea to allow the Euro to be created without the member countries being told that their competitiveness versus other member nations would dictate whether or not they would be able to pay their bills.

Readers should consider that under much smoke and mirrors this is a proposal that the Greeks should print their own Euros as needed, namely they issue these 1-Euro bonds, use them to pay pensioners, etc. in lieu of giving the pensioners 1-Euro coins, and then make clear that the bonds will automatically be accepted for tax payments. This is the same as having the Greeks restore the Drachma in part without, however, actually restoring the drachma.